Investing and Banking & Finance and Calumet Specialty Products

Can oil refiner Calumet keep dividend gushing?

March 1, 2014
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Shares of oil refiner Calumet Specialty Products Partners sport a 10.1-percent dividend yield—a mighty alluring payout in this era of continued low interest rates.

But a debate is raging in the investment world over whether the rich dividend makes the Indianapolis-based company an attractive investment opportunity.

On the surface, all looks grand. Disappointing fourth-quarter results pushed the stock to below $27, nearly 30 percent off the 52-week high reached in March. Big dividend payouts combined with a nice rebound in the stock price could make shareholders a bundle.

But that’s based on the assumption that Calumet has the financial wherewithal to keep paying the dividend—something observers say is far from certain. If the company were forced to cut its dividend, investors might savage the already-beaten-down stock.

“For 2013, Calumet came up way short of the cash required to cover the distributions paid to investors,” forcing it to dip into other funds to cover the payouts, according to an analysis by the research firm MLP Data. “The company should do much better in 2014, but will the earnings recovery be enough to sustain the current dividend rate?”

The decline in the stock price has pushed the dividend yield ever-higher, with Calumet now boasting the 18th-largest yield among the more than 3,000 companies that trade on NASDAQ.

Calumet operates refineries and other facilities across the country that churn out vehicle and jet fuel, along with solvents, waxes and other specialty petroleum products. Partly through acquisitions, the company has grown rapidly, with revenue surpassing $5 billion for the first time in 2013.

Bouncing back

Analysts agree a lot of good things are happening. For example, Calumet recently reached a deal to supply the synthetic lubricant line Royal Purple—which it acquired in 2012 for $335 million—to more than 2,400 Walmart locations. And other acquisitions have positioned the company to tap new markets overseas.

But 2013 was bumpy. Results were dragged down by unscheduled downtime at a pair of refineries, as well as investments to launch or expand other refineries. In addition, weak “crack spreads”—the difference between the price of refined products and the price of oil—battered profit margins.
 

Straumins Straumins

“With a heavy refinery turnaround schedule now in the rearview mirror, the true earnings power of the Calumet model should come into clearer view,” Raymond James analyst Darren Horowitz wrote in a report.

Yet Calumet faces obstacles to maintain the current dividend payout of 68.5 cents per quarter—the level it has maintained the past three quarters. That rate consumes $48 million per quarter, or a total of $196 million a year. That’s well within the $219 million in distributable cash flow the company generated in 2012 but 10 times the $19 million in cash flow generated last year.

On a Feb. 15 conference call with analysts, Calumet officials were reassuring without making outright promises.

“Despite some variability in our quarterly results during the past year, we stayed the course in our commitment to pay a robust quarterly cash distribution, given our continued confidence in the long-term growth prospects of the business,” President Jennifer Straumins said on the call.

At another point, she added: “Although the decision to increase or maintain or decrease distributions is a discrete decision made by our board of directors on a quarterly basis, we believe the anticipated increases [in earnings] stemming from … growth projects could provide a strong base upon which to resume growth in distributions.”

Big payouts

Questions about sustaining dividends are nothing new for companies in the oil-and-gas industries, where many operate as publicly traded partnerships. Calumet and others of that ilk don’t pay income taxes and thus are able to funnel more earnings to investors in the form of dividends.

It’s worth noting that Calumet has proved doubters wrong in the past. The company did cut its dividend in 2008, amid the global financial crisis. But in the ensuing six years, management increased the payout 52 percent.•

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